Possible Points of Contradiction between Fiscal Policy and Debt Management Objectives (in Developing Countries)

Abstract

Nenova and Kaloyanchev discuss possible conflicts between the targets set by budgetary policy and those set by debt management in developing countries. These counties are typically characterised by low income levels, poor infrastructure and fragile confidence in policies commitment. In order to cope with these problems budgetary policy is likely to lead to deficit financing and to debt accumulation. In this case the scope of debt management operations narrows and this narrowing positively depends on the speed of debt accumulation as it influences the dynamics of the risk premium on debt. In order to bring debt dynamics under control, the government has to inverse its priorities and to privilege debt management objectives. The authors stress that even if the fiscal adjustment takes place, it may take a long time before the risk premium reaches low levels (especially if there has a been a default on debt). These findings are confirmed with reference to the Bulgarian experience.